Now for Disney’s first D’Amaro quarter…

The big win for new Disney C.E.O. Josh D’Amaro in his first earnings call this week has gotta be the fact that nobody really noticed or cared that it was D’Amaro’s first earnings call. The quarterly numbers were good: Streaming profits shot up by double digits for the first time, Avatar: Fire and Ash and Zootopia 2 juiced studio revenue, and the Trump economy isn’t hitting the parks and cruises too hard. D’Amaro avoided obvious gaffes—nothing remotely as funny/tragic as Bob Chapek plugging Disneyland’s “Oogie Boogie Bash” as investors gasped over a $1.5 billion loss in streaming—and Josh displayed a confidence that obscured his inexperience, despite the recent dustups over The Bachelorette and Jimmy Kimmel and OpenAI that marred his first two months in the job. D’Amaro even took a question from Rich Greenfield, the semi-frequent Disney antagonist, who hasn’t been called on in years.

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D’Amaro and C.F.O. Hugh Johnston took a page from Netflix’s “investor letters” and dropped a surprise, 3,000-word mission statement along with the earnings data, articulating strategies that D’Amaro has talked about before but never this pointedly. Organized around three “pillars,” the manifesto was short on specifics but is essentially a blueprint for how D’Amaro will run things—and at least in the very short term, it seems to have been effective. The Disney stock shot up about 8 percent in two days. Most importantly, nobody even mentioned the words “Bob” or “Iger.”

So let’s translate what D’Amaro did and didn’t say in introducing his three pillars…

What he means: Franchises, baby! That’s an obvious goal for any Hollywood studio, of course, but D’Amaro is articulating a renewed focus on what makes Disney special: content that can become overcrowded theme park lands in Shanghai, or a cute backpack at Target, or a $19 specialty cocktail on the Disney Adventure. Josh may have copied the Netflix earnings-announcement playbook, but he knows that the big differentiator—sorry, the only differentiator at this point—between Disney and Netflix or YouTube or Amazon or any other scaled competitor is the brand and the established I.P. If there was still any confusion about that, Netflix revealed its enduring envy of Disney by trying to buy Warner Bros.

It’s not an accident that the word “fans” was mentioned 10 separate times in D’Amaro’s manifesto—as in, “We monetize relationships with our worldwide fans” and “Our fans have embraced the story and characters…” Everything, in his mind, is about connecting the consumer to the Disney brand.

I’m sure it’s hard for a career parks guy to look at the film studio and justify anything that isn’t going to boost the experiential business. You can almost hear him asking why Disney is bothering with Send Help or Whalefall or the entire Searchlight operation. But those singles and doubles boost the subscription streaming business, which grew revenue 13 percent in the second quarter compared to the prior year. Plus, Devil Wears Prada 2, which looks like it’ll end up crossing $600 million worldwide, started as a $35 million-budgeted book adaptation at Fox. But they’re not Toy Story: five movies over 30 years and I.P. that performs everywhere—theaters, Disney+, ABC, parks, cruises, Halloween costumes. And the execution of the movies has not declined during that time. The franchise endures.

What he’s not saying: The costs of all this “endurance” and “connectivity.” Disney routinely spends more than rivals on its I.P. films, a challenge that D’Amaro needs to address head-on if the new box-office normal is Marvel movies that gross $400 million to $500 million worldwide, and Pixar originals that eke out $350 million. Hoppers is at $370 million worldwide and D’Amaro name-checked it as a “strong example of our focus on original I.P.,” but that’s about what The Good Dinosaur grossed in 2015—$472 million, if adjusted for inflation—and that movie was considered a historic Pixar misfire.

Further, Prada 2 worked because Disney’s top marketer, Asad Ayaz, treated it like a Marvel movie, with a promo budget of more than $100 million, per two sources. In the end, the box office justified that expense, and there’ll probably be a Prada 3, Meryl willing, but the overall cost for each attempted spin of the Disney flywheel keeps going up. Not great when some of those spins are invariably gonna lead to Eternals or Tron: Ares, which can make nine-figure marketing blitzes look very stupid, very fast. Other than layoffs to consolidate marketing, D’Amaro hasn’t articulated how to bring those costs down.

The cost burden is even more pronounced in sports, which is the definition of breakthrough content—it’s now the only reliable audience generator in linear TV, not counting the lucrative geriatric fearmongering on Fox News and MS NOW. But in deciding to stay in the linear business, and thus the sports business, D’Amaro is committing Disney to tens of billions of dollars in rights fees in the coming years. The manifesto specifically calls ESPN “core to our long-term strategy,” a coy play on Iger’s 2023 declaration, later walked back, that the Disney TV networks “may not be core.” A sale of the TV networks would be “highly complex and in our view unlikely to create value for shareholders, especially given where linear networks are valued in today’s marketplace,” D’Amaro wrote. Translation: Plenty of suitors have kicked those tires, and nobody wants these loser businesses.

But now that he’s sticking with linear, he’s gotta deal with the drag until the streaming side is big enough where it doesn’t matter. Looking ahead to next quarter, D’Amaro predicted the profitability of the ESPN unit would drop 14 percent due to “a double-digit-percentage increase in programming expenses, including the timing of new rights agreements.” That’s the new $2.6 billion-a-year NBA deal, among others. And the NFL is coming for more. Not stated is what happens if (when?) the cost of ESPN finally outweighs its value to the company.

What he means: “One Disney,” people! It’s everywhere in the D’Amaro messaging… so much so that one Disney veteran half-jokingly asked if Josh would soon have it emblazoned next to Mickey on the Burbank water tower. He wants a “single, cohesive, and digitally integrated ecosystem,” as he emailed staff back in March—both on the Disney+ interface and in how the company operates.

A MESSAGE FROM OUR SPONSOR

It was a love story that captured the attention of the nation. From Executive Producer Ryan Murphy,  FX’s Love Story: John F. Kennedy Jr. & Carolyn Bessette is an “enchanting fairy tale…transportive” (The Hollywood Reporter), starring Sarah Pidgeon, Paul Anthony Kelly, Naomi Watts, Grace Gummer, and Alessandro Nivola.  For your Emmy^® consideration in all Limited Series categories, with all episodes now streaming on Hulu and Hulu on Disney+ for bundle subscribers.

Sounds nice, but Disney already promotes its own projects pretty aggressively across platforms. Have you watched SportsCenter lately? It’s often a series of elaborate plugs for Marvel and Star Wars and lately, Devil Wears Prada 2, a real event for the average sports bloke. Look for parks-oriented content to have a presence at the Disney upfront next week in New York, I’m told. And so on.

Never mind that Disney overcame its kiddie-movie roots and worked so well as a mass-media conglomerate in part because the parks operation stayed away from the movie people, who let the ABC News team do their thing, and nobody leaned on the Disney brand when it didn’t make sense. That’s the strange thing here: D’Amaro is preaching “One Disney” while also pledging to keep intact all the parts of the company that don’t serve the larger Disney brand: sports (and sports gambling), the FX linear network, the R-rated movies, to name a few. When I talk to longtime Disney people, they’re most skeptical of this “One Disney” goal—“Fantasyland,” one friend at the studio called it. Another noted that Comcast, with its Symphony program, only marshals the whole company to boost specific projects, like the Olympics or Wicked. D’Amaro wants to Symphony everything.

But “One Disney” does serve as a nice reminder that when a project works, it often works across many different businesses—especially parks. That may be why the messaging is resonating on Wall Street: It’s based on efficiency and execution. In a note yesterday, Peter Supino, the analyst at Wolfe Research, called D’Amaro “the perfect action hero to convince a generation of skeptical investors that Disney’s 10-year, $60 billion expansion of its experiences segment is a bull case worth their capital.”

What he’s not saying: “One Disney” is also a justification for further layoffs, as it was when “streamlining” the various marketing units claimed hundreds of jobs last month. I’m told more layoffs are coming later this summer.

What he means: A.I. is coming, and fast. This is gonna be the most disruptive aspect of the D’Amaro agenda. Developing and deploying A.I. across the company’s platforms and animation and effects-heavy studio divisions will be as unpopular as it is necessary to compete with aggressive competitors like Amazon and Netflix, whose roots are up north.

To that end, the collapse of Disney’s partnership with OpenAI is likely a blessing for D’Amaro. The deal opened the door to the technology, and now all the A.I. companies want to work with Disney—hopefully on Disney’s terms. Plus, if the OpenAI deal that Iger announced in December had worked, Iger would have received all the credit. If it didn’t, D’Amaro would’ve been saddled with the fallout. Now, D’Amaro can forge his own path, either with OpenAI or any number of competitors.

D’Amaro has been pretty open about his plan to elevate Disney+ “beyond a premium streaming video service,” as he writes, and into a hub for all aspects of a customer’s life, from film and TV to user-generated content to socializing to gaming and shopping and managing vacations. I’m told it was part of his pitch to board chair James Gorman and the C.E.O. search committee. Which makes sense. The biggest companies of the modern era—say, Google and Amazon and Apple—benefit greatly from spokes of businesses that radiate from a core product, like search, shopping, or phones.

In theory, D’Amaro would probably call Disney’s core product its “storytelling.” But, practically speaking, the company will be served well if that core product is the Disney+ portal. Leveraging Epic Games—whether Disney buys it or just integrates into Fortnite—seems key to that strategy as well. There’s a reason why D’Amaro shifted the games unit into the content group under Dana Walden. On Disney+, if it works properly, everything will be part of a Disney fan’s story.

What he’s not saying: Nobody knows how A.I. and interactivity is gonna play out, of course. Tech goliaths change their goals and agendas quickly, as Disney learned with OpenAI and Sora, and boosting copyright owners is typically not a priority. Chapek also talked about a “super-app,” and nothing materialized. (Remember when he created a specialized unit to pursue Disney’s place in the “Metaverse”?) Laying out a mission statement is a nice start, and the market seems to be responding, but at some point, D’Amaro will need to do something bold and unexpected to really put his stamp on Disney. And he’s not yet saying what that might be.

See you Monday,
Matt

Got a question, comment, complaint, or childhood games for Katzenberg’s next conference? Email me at Matt@puck.news or call/text me at 310-804-3198.

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